Tuesday, January 13, 2009

Getting Better All the Time?

Some straws in the wind from today's news re what ails us:

1. From Investor's Business Daily, DirecTV (DTV, NYSE) said that it has closed on a $3 B stpck repurchase program and has started up to a $2 B add'l repurchase program. It said that it has bought back about $8.2 B of stock in the last 3 years.

"Last month, the company said hiring would be frozen and all but the most critical capital projects would be suspended as visibility on the economy remained poor."

Does anyone but me think that the company is, to put it politely, off-base in its strategy and its stock is a "sell"? On the one hand, business stinks and it can't grow its business because business stinks, but on the other hand, it can continue to buy back stock so that whoever wants to sell the stock can find a buyer at a more attractive price than if the company did not enter the market as a buyer. Here's a modest proposal for the geniuses at DTV. Instead of speculating in your own stock, pay dividends. The Company has NEVER paid a dividend, according to Value Line. But why isn't management interested in juicy dividends, given that capital gains taxes are currently equal to qualified dividend taxes: because they own less than 1% of the company, that's why!EconblogReview suggests that if that's what management believes it should own, others should conclude that they should own 0%.

The suspicion, of course, is that management wants to be able to exit its option positions at the best prices and so wants to prop up the stock price. So they continue to borrow money to buy back stock and leave the Company with minimal tangible book value relative to market cap. It's a modern variant of pump-and-dump that in bad times can lead a Company to fail. But management doesn't own much stock . . .

So here's one of many examples that even the threat of Great Depression 2 hasn't changed behavior of the captains of industry.

Credit Crunch Over? Best Week for Debt Sales in a Year Raises HopesAnother example of reversion to the wrong side of the Street. Where is the recovery in the sale of equity? Anyone who has been around for a few years will recall that the "recovery" in mid-decade was largely debt-financed. But equity persists and debt creates two parties who are structurally adversaries joined together in a lender-borrower relationship. It is the view here that the "credit crunch" is a necessary corrective to a misallocation of financial resources and should be cured by emphasizing equity and less debt. But since the Fed deals in borrowing and lending, we can't be optimistic as its power continues to increase (though it may be approaching insolvency on a mark-to-market basis).

3. Many individual stocks continue to drop on bad news.

4. Many medical companies, such as Intuitive Surgical and Hologic, and hospital companies, are reporting that the economic situation has materially affected business. These med-tech companies are often world leaders. That their operations, and their associated stock charts, are rolling over is a really, really bad thing. You can't sugar-coat that.

5. Even the WSJ has made it semi-official: Citi is a dead duck, or a dead man walking, or something like that. Yesterday's Deal Journal quotes Roger Ehrenberg at Information Arbitrage approvingly:

"Wipe out common and junior debt holders. Sell off good assets to the private sector or spin them off. Warehouse bad assets and work them out over time. But Sandy was right; shareholders and the Government permitted Citigroup to become too big to fail. Well, it needs to fail. Just not in the haphazard, destructive way that Lehman failed. It can be done much, much better.”

"C" is down pre-open but closed yesterday with a stock market value of $30.5 B.AIG has a market cap of $4 B (you the taxpayer having spent well over $100 B to preserve that "value") and Fannie and Freddie are each "worth" under $1 B. Anyone who still owns Citi's common stock is a gambler. The infinity of mutual and other fund managers who have been net long Citi are in my view worse than gamblers.